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In a historic move, US regulators have granted approval for exchange-traded funds (ETFs) that directly invest in Bitcoin, marking a significant milestone for the approximately $1.7 trillion digital asset sector. The Securities and Exchange Commission (SEC) has given the green light to funds managed by industry giants BlackRock, Invesco, and Fidelity, as well as smaller players like Valkyrie, paving the way for trading to commence on Thursday.

This decision marks a rare shift by the SEC, ending over a decade of opposition to Bitcoin ETFs. The journey began in 2013 when Tyler and Cameron Winklevoss proposed the idea. The unexpected application by BlackRock in June last year, coupled with a court ruling stating the denial of a different application was “arbitrary and capricious,” triggered a surge in the cryptocurrency market, fueled by speculation that regulatory approval was imminent.

SEC Chair Gary Gensler, while emphasizing that the SEC did not endorse Bitcoin, cautioned investors about the risks associated with the cryptocurrency. Gensler stated, “Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.”

A key concern in the SEC’s past rejections was the lack of a regulated exchange capable of effectively monitoring Bitcoin trading to detect fraud and manipulation. However, in the recent review, the SEC examined the correlation between spot and futures trading, concluding that irregularities on exchanges like Kraken and Coinbase would likely be reflected in the futures market.

Bitcoin experienced a 3.4% increase to $47,500 following the SEC’s approval. This move is expected to provide both retail and institutional investors with the opportunity to diversify their portfolios with crypto exposure without the complexities of custody issues. Campbell Harvey, a finance professor at Duke University, noted, “The ETF makes it easy to add to your portfolio.”

The approval of Bitcoin ETFs is seen as a crucial step in bringing the cryptocurrency industry closer to the more regulated traditional finance world. It also signifies a milestone in the industry’s maturity, particularly as regulatory clashes intensified following incidents like the collapse of Sam Bankman-Fried’s FTX empire.

This breakthrough follows a recent victory for Grayscale Investments, where a federal appeals court overturned the rejection of Grayscale’s application to convert its Bitcoin trust into an ETF. The SEC’s loss in that case contributed to the decision to approve the current set of applications.

While the approval of Bitcoin ETFs is celebrated as a landmark event, industry participants acknowledge that there are still aspects to navigate. SEC Commissioner Hester Peirce, a vocal supporter of the industry in Washington, expressed her delight, saying, “There are still pieces of it to go, but this is a big milestone.”

By: Delino Gayweh
Serrari Financial Analyst

January 10, 2024

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